The Westpac share price fell in September, but there was a silver lining

It wasn't all bad for this major bank.

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The Westpac Banking Corp (ASX: WBC) share price suffered last month, dropping by 3.6%. It underperformed the S&P/ASX 200 Index (ASX: XJO) slightly, which only dropped by 3.5%.

There is a lot of volatility going on with the share market right now as investors digest the news of a stronger oil price and growing signs that interest rates may be higher for longer than expected.

Even US Federal Reserve members are suggesting that interest rates may increase yet again.

Why are higher interest rates hurting ASX shares?

Interest rates are theoretically key for valuations, they're meant to act like gravity. The higher rates go, the stronger it 'pulls' down on asset prices. Why take the risk of investing in assets like (commercial) property or shares when investors can get a stronger return from safer places like savings accounts or government bonds?

For ASX bank shares like Westpac, there's an added complication that higher rates increase pressure on borrowers and could lead to worsening arrears, larger bad debts and bigger provisioning – this would be bad for profit and cash flow.

So far, Westpac hasn't reported a large increase in arrears yet. However, there is reportedly a larger increase in arrears for non-bank lenders.

Silver lining for the Westpac share price?

According to reporting by the Australian Financial Review, the ASX bank share has grown its mortgage book, faster than its rivals, for the third month in a row.

The news outlet said that Westpac saw $3 billion of additional mortgages, which was an increase of 0.6% in percentage terms and almost double the growth rate of the overall loan system.

This increase meant that Westpac's market share of mortgages grew to 21.4% at the expense of others, such as Commonwealth Bank of Australia (ASX: CBA).

This is reportedly the highest market share Westpac has achieved since December 2022.

However, this may be coming at the expense of the profit margin, as measured by the net interest margin (NIM). The AFR quoted Goldman Sachs analyst Andrew Lyons, who said:

While we've seen some relief in mortgage competition, we do not expect this to be sustained over the remainder of 2023 and into 2024, and with ongoing deposit (pricing and mix) pressures, we now forecast financial year 2024 and 2025 net interest margins down.

CBA has been about 20-30 basis points above the market on front-book mortgage pricing…it is apparent that peers are not following CBA's attempts to improve front-book profitability.

We'll have to see if Westpac is able to hang onto its recently won market share and what impact this is having on its margins. It could be a key factor for the Westpac share price over the next year.

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